<THE RULE BREAKER PORTFOLIO>
What Happened to Fool Port?

Amazon's Lickety-Split
Plus... Mr. Jones, Mr. Jones, Mr. Jones

By David Gardner

Alexandria, VA (Jan. 5, 1999) -- The Rule Breaker Portfolio maintained its early fledgling lead over the 1999 market indices Tuesday, despite slightly underperforming. The Breaker Port was up 1.29%, a sliver less than the S&P 500's 1.36% and a half percent less than the Nasdaq's 1.96%.

Every year in Rule Breakerdom, we partially wipe the slate clean and start over. I say "partially" because the historical percentages are all that really matters, but we definitely do enjoy following our money on a year-by-year basis, and -- like screaming college basketball fans -- try to get up in the market's FACE every 365 days with our big foam #1 fingers.

It's been interesting seeing how much big stocks continue to outperform small ones. I see that the Russell 2000, a small-cap index we track on our main page at http://quote.fool.com, was once again weak in the face of S&P and Nasdaq big-cap strength. I'm wondering whether we are in fact entering a new business climate in which only the companies that have global aspirations and legitimate global possibilities will thrive. It's entirely possible, though unprecedented. If this is the case, we may continue to see the Russell 2000 underperform the big market averages, even though over most of the rest of this century, small caps have been the best place to be. I still believe in and enjoy small-cap investing, though it's been frustrating to see a small-cap like 3Dfx (Nasdaq: TDFX) get so little respect from institutional money managers. The message for the past few years has been, "If you ain't big, you ain't noticeable."

I want to personally welcome a new entrant into our Hall of Portfolios, none other than the Harry Jones Portfolio. Harry will be around a long time in Fooldom, taking a very simple approach appropriate for any newcomer who's looking to get started Foolishly and correctly on the road to investment success. You can read Harry's second report today right here, as well as read about him and his investment principles here. We've all been ribbing Mr. Jones about how much he paid in commissions yesterday for his first trade, but you have to remember this is the work of a new investor who doesn't have -- and may never own -- a computer. He's making his own decisions with his money, paying no mind to the Wise, and he'll make a few mistakes like any of us. The key is to learn from one's errors.

By the way, for those interested in keeping up with the Joneses, you'll need to bookmark the page right here because it's not officially listed in the Hall yet. Should be a quick worthwile read every night.

Harry's Port did right about what the market did today. Did yours?

As for our own stocks, we lost to the market today, so in Foolish fashion let's headline our list of losers. For the many new people coming into Fooldom tonight for their first time, this is the way we do things: We usually do the exact OPPOSITE of whatever Wall Street does. In this case, you'll almost NEVER see ANY Wall Street type on financial TV even admitting he has any losers, let alone study them out front of people in order to learn from mistakes made. The average Wall Street suit -- what at Fool UK they call the "stripey-shirts" (there's a lovely UKism, for you) -- needs to maintain a bulletproof exterior because his company's image depends on it. Like the glass facades of the crystal skyscrapers of the Wise, no scratches allowed. Unfortunately, the unforgiving lens of accountability will continue to expose all the many scratches, in future -- as it already is, at present.

So anyway, America Online (NYSE: AOL) was our top loser today, giving back another $2 1/2 to close at $146 1/2. The conventional wisdom was that as soon as this stock hit the S&P 500, it would get a nice healthy boost. In fact, what has instead happened is that AOL has rung up two straight multidollar losses this week. This is only the latest example of that old Foolish saw, "Buy on the rumor, sell on the news." Applied here, what that tells you is that before something happens, the market anticipates it and rises. Once the thing ACTUALLY happens, the market often sells off. This confounds many people, who expected that when that stock hit the index fund, when that drug got approved, when that hot earnings announcement was finally reported, that their stock should go UP. WAY up. But in fact, more often than not it seems, it drops. Why? The market at large has already bid the stock up, has "bought on the rumor and sold on the news." Keep in mind that this is a short-term phenomenon of not more than trivial interest to Foolish long-term investors. We're not too hung up on AOL's two days of losses, neither did we get too giddy after their preceding two weeks of amazing gains.

Starbucks (Nasdaq: SBUX) also put a drag on our Rule Breaker performance today, dropping $1 7/8 to $52. The company announced a surprising and somewhat disappointing 1% gain in same-store sales versus the comparable month a year ago. What that means is that for Starbucks stores open for 12 months or more, those stores exhibited in aggregate a 1% gain over the amount of business they'd done in December a year before.

Considering that Starbucks has consistently been putting up tallies of 4% or greater same-store sales gains, we're sorry to see that at just 1%. Then again, these changes from month to month are notoriously erratic and fleeting. I wonder to what extent the numbers might be lowered in the future by the increasing amounts of Starbucks coffee being sold in the supermarkets, thanks to the distributional partnership with Kraft. Maybe lowered significantly, or maybe not at all. In fact, you could even construct an argument that the more Starbucks appears in supermarkets, the more people will also begin visiting their local Starbucks cafe.

As always, there are lots of ambiguities here. We keep our minds open as investors, watching and studying.

We did have a good stock or two today. Some of our Dow heavyweights posted good days, with Du Pont (NYSE: DD) rising $1 7/16 and AT&T (NYSE: T) jumping $1 3/4. The lion's share of our gain today came from Amazon.com (Nasdaq: AMZN), though, which split 3-for-1 last night and wound up gaining $6 3/16 today. That's a 5% gain, equivalent to a gain of $18 9/16 under the old price. Considering that Amazon had alreadly split 2-for-1, that's actually a gain of $37 1/8 from our original purchase price (not bad, considering we paid $39).

Now here's a question for you. Which is best -- that $6 3/16 gain today, or an $18 9/16 gain yesterday, or an equivalent $37 1/8 move had the stock never split at all? The answer is below.

I hope you'll join us on the Rule Breaker message board, where the search is always on to discover the NEXT Rule Breaker. I've already found a couple of good ideas from the message board.

Also, we're looking for a short or two, using the same approach we used to find Trump and Quarterdeck -- our last two shorts, both dynamite short winners in a strong bull market. Unfortunately, when I ran the numbers last week I didn't find much of interest, so we'll have to keep looking. I would like to see 2 or 3 shorts in this aggressive portfolio, all told.

The answer to the question above, for new investors, is of course that there is NO difference between the three different Amazon moves. Each represents a gain of just 5.23%.

People get too hung up on dollar values, and forget the percentages. Reminds me of one of my favorite chapters in our new book, a chapter entitled "Percentages, NOT Points." It's a lesson that all the world must know -- but I particularly wish the media would get it.

To close this long report, may you Break a Rule or two in your own life, as we together enter another New Year. Whether our stocks are up or down, I believe 1999 will be an amazing year for us (all of us) and the world at large.

So shall we close with a nod to Tiny Tim? "God bless us, every one."

Fool on.

-- David Gardner, January 5, 1998

Would you work for a bunch of Fools?

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01/05/1999 Close

Stock  Change    Bid 
 ---------------- 
AMZN  +6 3/16 124.50
AMGN  -  3/8  107.00
AOL   -2 1/2  146.50
T     +1 3/4   79.63
ATHM  +1 1/4   80.25
DJT   +  3/16   4.38
DD    +1 7/16  56.81
XON   -  3/4   71.88
IP    +  15/16 42.81
IOM   +  3/8    8.00
LU    -  3/16 114.00
SBUX  -1 7/8   52.00
TDFX  +  1/8   13.88
 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  +1.29%   3.36%   3.36%  937.44%   69.79%
        S&P:     +1.36%   1.26%   1.26%  171.55%   25.37%
        NASDAQ:  +1.96%   2.67%   2.67%  212.60%   29.42%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    146.50    7959.64%
   9/9/97  1320 Amazon.com     6.58    124.50    1792.32%
  5/17/95  1960 Iomega Cor     1.28      8.00     524.80%
  10/1/96    84 LucentTech    23.81    114.00     378.83%
  8/12/96   130 AT&T          39.58     79.63     101.19%
  4/30/97 -1170*Trump*         8.47      4.38      48.34%
  12/4/98   450@Home Corp.    56.08     80.25      43.10%
 12/16/98   290 Amgen         85.75    107.00      24.78%
  2/20/98   200 Exxon         64.09     71.88      12.15%
  2/20/98   215 DuPont        59.83     56.81      -5.05%
   7/2/98   235 Starbucks     55.91     52.00      -6.99%
  2/20/98   270 Int'l Pape    47.69     42.81     -10.23%
   1/8/98   425 3Dfx          25.67     13.88     -45.94%

    Rec'd    #  Security     In At     Value      Change
   9/9/97  1320 Amazon.com  8684.60 164340.00  $155655.40
   8/5/94  1100 AmOnline    1999.47 161150.00  $159150.53
  5/17/95  1960 Iomega Cor  2509.60  15680.00   $13170.40
  12/4/98   450@Home Corp. 25236.13  36112.50   $10876.37
  10/1/96    84 LucentTech  1999.88   9576.00    $7576.12
 12/16/98   290 Amgen      24867.50  31030.00    $6162.50
  8/12/96   130 AT&T        5145.11  10351.25    $5206.14
  4/30/97 -1170*Trump*     -9908.50  -5118.75    $4789.75
  2/20/98   200 Exxon      12818.00  14375.00    $1557.00
  2/20/98   215 DuPont     12864.25  12214.69    -$649.56
   7/2/98   235 Starbucks  13138.63  12220.00    -$918.63
  2/20/98   270 Int'l Pape 12876.75  11559.38   -$1317.38
   1/8/98   425 3Dfx       10908.63   5896.88   -$5011.75

                              CASH  $39332.55
                             TOTAL $518719.49
 

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